Saturday, May 20, 2017

The bull market and Donald Trump's death knell

In the minds of many investors, the election victory of Donald J. Trump to the
United States Presidency was nothing short of a miracle. Following his
shocking victory, expectations were high that Trump would, with the help of
Congress, fulfill his promises of tax reform and infrastructure spending.
The lifting of the heavy penalties associated with Obamacare was another hope
that investors cherished. Many hailed his victory by declaring that it
was “morning in America” again.But after
only six months since the election, Trump's presidency has hit a potentially
fatal obstacle and he now faces the growing possibility of impeachment.

By now the particulars of the political onslaught against President Trump are
well known and there is no need to recount it. Impeachment in the wake of
recent developments has become an increasing likelihood, and it is said that
even the Trump White House is preparing for it. It now
appears that the president will be investigated by a Congressional inquiry with
the possibility of eventually being replaced by his vice president. The
powers-that-be, it seems, have decided they've seen enough of Trump's muscular
leadership and controversial America-first plans.

How did America come full circle so quickly? What started as a widespread
hope that a president who fully understood the needs of commerce and would do
everything in his power to further America's economic future now faces an
ignominious ending. Can this be chalked up to voter's remorse or
the volatile temper of the American voter? Or is it simply a case of
Trump's ideological opponents taking an aggressive approach to derail his
ambitious reform plans?

A more likely answer is that Trump's election was a fluke and that it was never
intended that a man of such convictions could ever be allowed to lead today's
left-leaning society. There are a few basic principles which can be
addressed here. One is that the leader of a free country is generally a
reflection of the people he represents. Is it credible to assume that
today's average American favors the type of free-enterprise capitalism
championed by Trump? America's shift to the left of the political
spectrum has become pronounced in the last two decades and the long-term trend
is conducive to more socialist activism, not less, in government. France
has only recently been reminded of that and the U.S. is now being faced with
that lesson.

If anything, Trump's election victory was an aberration – a counter-trend rally
in financial market terms. It was born of deep frustration among middle
class voters. After the painful experiences of the Great Recession and
years of stagnation, Main Street America was in a rebellious mood. Donald
Trump represented a radical departure from Washington-as-usual and, unlike the
other candidates, he addressed middle class concerns in the most vigorous terms.
Voting for Trump was essentially an act of defiance, a way of rejecting the
Establishment which professed concern for the plight of the middle class but
did nothing to help it.

Indeed, Trump's election was tantamount to a full-scale middle class
revolt. As with all revolutions, however, this one appears destined to
end at the point of origin with no net progress to show for it. (A
revolution, after all, consists in making a full circle according to a literal
rendering of the word.) Since his election victory was against the
primary trend toward socialism, Trump's eventual replacement as president will
almost certainly be in line with the status quo, and the middle class will once
again be ignored.

Incidentally, the word revolution has more than one application here. The
long-term economic Kress cycle which bottomed around the year 2014 was
described by the late cyclist Samuel J. Kress as the “Revolutionary Cycle.”
This observation was based on the cycle's tendency to usher in a new
socioeconomic order when it bottoms (e.g. the transition of the U.S. from an
agrarian to an industrial economy in the late 19th century). Before his death, Kress forecast that the
next bottom of the 120-year cycle around 2014 would witness the final
transition from free-market capitalism in the U.S. to a much more aggressive
socialist government. His prediction proved prescient when one considers
that the Affordable Care Act (a.k.a. Obamacare) was the first major legislative
inroad to full-blown socialism since the New Deal of the 1930s.

The revolutionary aspect of the long-term Kress cycle – which also
answers to the Kondratieff wave, or K-wave – provides the context for the mass
discontent we’ve seen develop in the U.S. and other countries in recent
years. From Occupy Wall Street to Arab
Spring to Brexit, discontent has been widespread in the wake of the 2007-2012 economic
malaise. Students of behavioral finance
are aware of the connection between financial market collapse and mass
psychology. After a major shock in the
financial market/economy, it usually takes several years for the resulting
psychological impact to fully disappear.
This is why revolutions are common occurrences in the years following
such a shock, not during the actual shock itself. Humans are reactive by nature and it takes
them a while, in the aggregate, to psychologically process an economic shock,
hence the delayed reaction to the economic event in question.

The mentality behind the above mentioned revolutions also resulted
in Donald Trump’s presidential victory.
But since this revolutionary episode was against the grain of the
prevailing political wind, its lifespan will likely be brief. Many European countries are already
rethinking their political reactions against the European Union. Now America will soon be forced to decide
whether it truly wants to commit to the path it chose last November.

Free market capitalism can survive only when a country’s citizens
are fiercely committed to preserving personal liberty and self-initiative. It requires a healthy, but respectful,
disdain of government interference and a reliance on one’s own ingenuity to
thrive. If the Obamacare debate was any
indication, America lacks the internal strength and will to survive as a
free-market economy. For this reason and
others, socialism will eventually reassert its sway in the U.S. once the wave
of revolutionary fervor subsides.

Returning to the subject at hand, how would a Trump impeachment
affect the markets? Will the secular
bull market in stocks continue if Trump were removed from office? What about the potential impact on the price
of gold? A successful Donald Trump
presidency replete with tax and Obamacare reform would not have been good for
the price of gold. Gold is primarily a
barometer of investor fear and uncertainty.
Tax reform would almost certainly have benefited both corporate profits
and the economy, and a booming economy isn’t normally conducive for a vibrant
gold market (the exception being a war-time economy). However, the uncertainty generated by an
investigation and subsequent impeachment hearings would likely serve to buoy
the gold price to some degree. The
greater the uncertainty surrounding the outcome of Trump’s trial by fire, the
more likely gold will benefit.

As
for equities, the secular bull market which began in 2009 for the S&P 500
is still alive and will likely remain intact even if Trump is impeached. The stock market hasn’t been as vibrant in
the last couple of years due to a variety of technical and fundamental factors,
including the uncertainties surrounding the U.S. political outlook. Yet throughout the ups and downs of the last
two years, there has been one constant: the lack of interest among retail
investors. Americans by and large lost
their appetite for equities several years ago and it shows little sign of
returning to normal in the immediate future.
This factor alone will ensure the bull’s longer-term survival throughout
the short-term uncertainties, for no major bull market can end until the
informed “smart money” investors unload their holding on uninformed
participants (“dumb money”). The big
money investors have to have someone to sell to as they can’t very well unload
their stocks amongst themselves. So
until we see the return of equity mania, we can be assured of the bull’s
continuance notwithstanding its reduced vigor.